With all the talk of tapering and expected hikes in interest rates by the Fed, inquiring minds are likely interested in what happens to interest on the national debt if the Fed ever does hike...
...the current blended rate of interest on the national debt is a mere 2.4% according to the CBO...
The "optimistic" projection of $668 billion assumes the rate will stay below 3.1% through 2020.
With that in mind, please consider the Fed's 'hidden agenda' behind money-printing.
One of the most important reasons the Fed is determined to keep interest rates low is one that is rarely talked about, and which comprises a dark economic foreboding that should frighten us all.
...How would you feel if you knew that almost all of the money you pay in personal income tax went to pay just one bill, the interest on the debt? Chances are, you and millions of Americans would find that completely unacceptable and indeed they should.
...isn't it fair to ask what the interest cost of our debt would be if interest rates returned to a more normal level? What's a normal level? How about the average interest rate the Treasury paid on U.S. debt over the last 20 years?
That rate is 5.7 percent, not extravagantly high at all by historic standards [and if] we were to pay an average interest rate on our debt of 5.7 percent, rather than the 2.4 percent we pay today, in 2020 our debt service cost will be about $930 billion.
Now compare that to the amount the Internal Revenue Service collects from us in personal income taxes... In 2012, that amount was $1.1 trillion, meaning that if interest rates went back to a more normal level of, say, 5.7 percent, 85 percent of all personal income taxes collected would go to servicing the debt. No wonder the Fed is worried.
You can see why rational economists (i.e., not economedian Paul Krugman) believe that the Federal Reserve has painted itself into a corner.
Tapering its asset purchases will result in (perhaps sudden) interest rate spikes, which will quickly bankrupt the country.
Failing to taper will continue to devalue the dollar until bond buyers recognize that the debts will never be repaid, at which point interest rates will enter the death spiral vortex.
Got Cloward-Piven?
Hat tip: BadBlue Real-Time News
2 comments:
I have spoken about the QE/interest rate/debt service quandary many times at The Political Commentator.
This point from July 2012:
A $15 trillion-plus U.S. deficit being funded currently at historically low interest rates. What do you suppose will happen to the federal budget when interest payments on that debt have to be paid at historically "normal" interest rates,
http://politicsandfinance.blogspot.com/2012/07/americas-issues-that-are-hiding-in.html
"Dr. Strange-Bernanke or: How I Learned to Stop Worrying and Love the Debt":
Here's the massive expansion of the dollar supply:
http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS
When that results in hyper-inflation, as it must, the debt will disappear - poof! - faster than you can say "Billion-dollar loaf of bread".
Of course, the ecnomy will collapse and there will be massive civil unrest. But, hey, no more national debt!
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